An Examination of Rating Agencies' Actions Around the Investment-Grade Boundary

By Richard Johnson
February 2003 
RWP 03-01
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      Data on credit ratings by the agencies with the legal status of Nationally-Recognized Statistical Rating Organizations (NRSROs) show some tendency for one-day downgrades that start from the lowest investment grade, BBB-, to travel more grades than those from neighboring grades. This would be consistent with the lower threshold of the NRSROs’ grade BBB- being at a substantial default probability, but also could occur simply because downgrades to junk severely impair some firms’ operations. A comparison of data from a non-NRSRO agency and an NRSRO shows that the latter’s regrades from BBBmoved in the direction of the non-NRSRO’s earlier ratings. This suggests the non-NRSRO defines its grade BBB- more narrowly than the NRSRO.

Keywords: Credit rankings, default, Egan-Jones Ratings, prediction, Enron, California utilities

JEL Codes: G2; G28; G14

Richard Johnson is an economist at the Federal Reserve Bank of Kansas City. The author would like to thank Pu Shen, Til Schuermann, Michel Crouhy and Ovidiu Daminescu for their comments, and Jonathan Corning and Thomas Schwarz for their research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or of the Federal Reserve System.

Johnson e-mail:  richard.johnson@kc.frb.org

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